Small business owners love to trick themselves, playing games with the numbers, making themselves feel their business is better than it really is. It’s a dangerous game. Here is one of the most popular ways this occurs…

Sales in a particular month, let’s say August, may be $50,000. This may represent a profitable month, however, three questions arise:
When do you ship? When do you bill? What are your collection terms? All add up to a bigger question: What do you actually expect to collect based on historical experience and knowing the particular customer’s paying habits?

If you ship in the third week of the month, and then take a week to invoice, at best you will receive the money two calendar months later. That’s two calendar months later than you may have planned on. If you booked the sale in August, shipped at the end of August, billed in the first week of September and net thirty terms are met, you will receive the payment in October. That’s a three-month cycle from order to receipt, if everything works perfectly.

You know, of course, that nothing ever goes so smoothly. It is possible that you invoice even later, your shipping takes more time than planned and your client pays later than net thirty. Let’s further assume that you only collect 80% of your receivables in net thirty, with the average being net 45 days. Since 20% of receivables will arrive even later, you may need a four-month projection to track the receivables, not the one month you are currently projecting. Realistically, the revenue is received over the quarter, reducing and spreading out your cash flow expectations dramatically. Unless planned for, this results in cash flow squeezes that can be very painful.

The sale is a good one, the flow is reasonable given industry standards and business practices, the problem is the failure of the small business owner to properly recognize the issues controlling payment and falsely expecting greater cash flow sooner than may realistically be expected. This can result in the destruction of your business until you recognize such cycles and account for the timing of collections according to what really happens, not what you want to happen.

So, yes, you may have booked $50,000 in August, but spread that expected cash over October and November and plan accordingly. This works. Pretending otherwise does not. Over time, you will better understand your own receivable cycle and thus be able to more accurately project revenue flow and plan accordingly.

Evaluate, track, monitor and control. That is your job. That is what you must be doing in regards to your cash flow projections. Do not ever make the foolish mistake of thinking that because you booked $50,000 in sales in August, you will receive $50,000 in September. It won’t happen, never did, never will! Stop pretending. Do the analysis and plan accordingly.